So, you are an Angel Investor with a strong business acumen, who unlike the venture capitalists(who invest other people’s money), would be investing smaller amounts of your own money in promising Startups!
If you are an Angel Investor or aspiring to be one, this article may be just what you are looking for before committing to this asset class!
Who are these ‘angels’ ?
Angels are the first external investors, who are investing their own hard-earned capital into startups. These could be HNIs, rich businessman, successful professionals or ex-entrepreneurs.
Why do angels invest money in startups? What are their motivations?.;;
While any investor looking to invest in startups is there to make financial returns, they do also sometimes have a secondary agenda of either learning about new technologies/ new sectors or motivations of giving back to the entrepreneurial ecosystem. If one thinks that investing in 1-2 startups would help them achieve their 10X return goal, then you are in for a big surprise. More on how to develop a portfolio strategy for investing in Indian startups in a later posts in this series.
Angels typically invest in angel rounds of an early stage startup, terminologies around which keeps on changing. Currently, the early stage scene in Indian startups look something like this
Job description of an angel investor
Like any other venture investor an angel investor has 4 jobs to do :
Deal Sourcing
Deal evaluation
Monitor startups portfolio
Enable exits
Sourcing
Angels continue to receive countless number of pitches throughout the year, that claim to take the market by storm! Some profess big ideas to be the Gen-next Social Platform, some lay claim to harbouring cutting edge technology, some assert discovering a miracle medical breakthrough and some declare harnessing power to change the way world works!!
In order to sift through all the claims, to reach to the ones, that would truly stand the test against time, Angel Investors must keep a hawk’s eye on credible opportunities or they stand to lose them amongst so many that would fail!
Sourcing can be : inbound, outbound (reaching out to incubators), co-investor network or references from other entrepreneurs. Better sourcing is directly proportional to amount of time and experience you spend in the ecosystem.
Evaluation :
To analyse any early stage opportunity, a simple framework which any investor should keep in mind is :
Market
Team
Product
Market
The first and foremost condition for investing in a startup should be a large and growing market. As a thumb rule for me for any market a startup is operating in should have enough opportunity for a business to become a size of ₹ 500 cr at scale. Investors must operate with utmost caution as most of the time the market size figures in the pitch deck will inadvertently be bloated! So you should be ready for a quick bottom-up calculation!
Team
Another core to any good investment and more so at a seed stage, is to figure out whether you are looking at the right team to invest in or not. A definition of a right team can vary for different investors. But to keep things simple, one investor should be able to answer following questions well :
Whether this team is invested enough to go through the entrepreneurship journey of highs and lows
What is their right to win
Do they have a deep customer insight and can they relate to customer’s pain points like no-one else
Analyse the chemistry between the co-founders and if they are capable to hire a rockstar team
As an Angel one must look for passionate founders with skin in the game! One must be able to see through the depth of their passion? Are they willing to be told “No” over and over and over again and still keep going? Scout for businesses that are off the ground through initial Investments from the Founders! These are signs that demonstrate Founders' firm belief in their own product/service
Startup should have complimentary teams. As an example, a medical startup not only needs a keen, business-savvy leader, but it also needs founders who are highly proficient, experienced and practising in the medical field.
Product & Traction
Lastly, one needs to evaluate product & business progress. This could include talking to the early customers to check the value-add of the product, doing financial analysis to get a comfort on the unit economics of the business, and the potential growth in the segment.
While each investor will view the traction with a different lens, one has to view the same from the perspective of sector in which the startup operates, stage at which investor is coming in and risk with which one is comfortable with. For eg:- A startup in social media, may be seen from the lens of users growth and retention, monetisation in the initial stages may not be the focus. But on the other hand if one is evaluating a SAAS product, it has to have paying customers which will prove the value of the product.
Managing Portfolio & Enabling exits are two very important aspects of an angel’s job, which I will cover on in subsequent parts of this blog series
From evaluation to investment decision
While market, team and traction form the basic building blocks of evaluating any early stage startup, to be really able to reach a stage of making investment decision, investors need to develop a strong conviction to invest their hard-earned money in crazy dreams of a visionary.
This conviction or some investors like to say this as the X-factor , could come because :
Investor feels there is a strong moat in what the entrepreneur is building. This moat or strong competitive advantage comes because of a deep customer insight, a strong domain understanding or because of a very innovative product
Investor has been impressed by charismatic founders and their grit to solve a particular problem
Investor feels because of their experience that startup is operating in a domain and building a solution which is definitely required by the customers
Every investment at seed stage always requires some leap of faith.
The thumb rule is to trust your instincts! One has to not rush into making decisions, at the same time refrain from being too picky. To give you an analogy, whether the pill is oval, round, square or a triangle, unattractive or unappealing, it shouldn't matter, end of the day it must serve its purpose of healing as per claim!
Once investor is convinced that he wants to invest in a startup, then would come the issue of going through the process of evaluating the terms of the round, including the valuation for that particular round.
I am planning to write a series of blogs on this topic. I would further cover – Options to do angel investing in India, What mistakes to avoid and what are some secret sauce of angel investing etc. Stay tuned with us to know more in the next post!
I have started this newsletter to share my learning in venture investing with VC aspirants, fellow investors and entrepreneurs. Idea is to connect the dots in the data-scarce VC world.
Happy to hear your suggestions on what else I can cover in my writings, I can be reached here. I intend to write more on career in VC, on deciphering the mind of a VC investor & and sharing good resources that I come across. I would try to publish atleast one article each week.